This blog post is based on a transcript from a Gray Decision Intelligence 2025 Master Class.
In higher education, margins are more than just numbers; they are the key to an institution’s ability to invest in its mission and navigate an uncertain future. Understanding and managing program economics is critical, as “There is no mission without margins.”
Understanding Program Economics
To effectively manage margins, you need to understand the nuances of your institution’s academic program economics. This involves a detailed analysis of revenue and costs at the course and section level.
Revenue: Following the Student
Revenue follows the student, flowing through the departments teaching the courses and into the student’s program. This dual perspective is essential for a comprehensive view of financial impact. For example, a Biology student may take courses in English and Math. The net revenue of this student will be attributed to the courses taken by student credit hour, and flow through to become the net revenue of the program. Stakeholders are then able to analyze both the revenue generated (and the students supported) by general education course enrollment and also by program.
Costs: A Comprehensive View
On the cost side, it’s essential to allocate pay and benefits by workload. This takes into consideration the time spent outside of the classroom. Regarding the allocation of workload, Elizabeth Atkins, Vice President at Gray Decision Intelligence (Gray DI) notes, “Part of what makes our methodology special is accounting for a department chair’s release time. If a department chair is only expected to teach a half-load of courses, it wouldn’t be fair to attribute 100% of their salary and benefits to the courses they’re teaching when you know that they’re supposed to spend half of their time outside of the classroom.” This allows stakeholders to understand the financial impact of the duties full-time faculty members are responsible for outside of classroom instruction. Most importantly, it quantifies any excess capacity if an instructor does not fulfill their expected workload during the year.
Contribution Margin: Not Profit, But Investment Capacity
The contribution margin, which is net revenue less direct instructional costs, is not profit. Margins not only keep the lights on, but they also fund reinvestment in an institution’s mission-critical programs and activities.
Beyond Enrollment: Analyzing Program Viability
A common misconception is that program size dictates financial viability. However, as the data reveals, most small programs generate a positive contribution margin. “Program size on its own does not dictate if a program can positively contribute financially to the institution as a whole”, according to Michael Hunter, Gray DI’s Director of Customer Success and Product. This insight is critical for institutions making strategic decisions about program investments and cuts.
Atkins supports this, stating, “If you were to use an ill-advised but common method of cutting programs based on low enrollment in the program, you would have a one in ten shot of making a correct guess about which program has a negative financial impact on this institution. That means you have a 9 out of 10 chance of picking a program that’s going to hurt you if you cut it.” This statement is based on Gray DI’s benchmarking dataset, where only 9% of programs in the smallest quartile of an institution’s portfolio are contribution-negative. Small program cuts are hard to justify financially when you jeopardize losing the revenue from students who will no longer enroll, while you must continue to teach out current students and retain the faculty until those students graduate.
Strategic Budget Cuts: Courses, Not Programs
In times of financial strain, budget cuts may be looming. It is essential to approach these decisions strategically. Ill-advised program cuts, such as those based solely on enrollment, can be detrimental. Atkins advises, “If you are faced with budget cuts, the area to look at is courses and not programs.” While most programs tend to be contribution-positive, courses cost money – and, program cuts tend to make the news, while reductions in course offerings do not.
Data-Informed Decision-Making: The Key to Fiscal Fitness
To ensure long-term fiscal fitness, institutions must embrace data-informed decision-making and be able to answer questions such as: What is the discount rate for students in this program? What does it cost to deliver this program? Or, what is the contribution margin of this department? Internal comparisons and external benchmarks can help identify areas of opportunity for stakeholders.
Tools such as provide valuable insights into program performance, enabling institutions to identify areas for improvement and make informed strategic decisions. By analyzing metrics such as contribution per student credit hour, institutions can optimize their resources and ensure a sustainable future.
In conclusion, margins are not just a financial metric; they are a strategic tool for higher education institutions. By understanding program economics, making data-informed decisions, and prioritizing fiscal fitness, institutions can navigate challenges, invest in their mission, and ultimately, take control of their destiny.
